Time for a Turn?

This is the opening segment from this week’s edition of Notes From the Rabbit Hole, NFTRH 544. This segment is usually written before I’ve done the weekend work, which is cool because I get to compare the pre-work things I think I know with the post-work things I do know.

Opening Notes: Time for a Turn?

It would not be wise to take one day, one glorious day of stock market tankage and gold relative performance as anything other than it was. But Friday was a bad day for the risk ‘on’, cyclical crowd. A real macro turn would have to start somewhere.

But last week NFTRH 543 had themes of inflation woven throughout it. If global macro inflation trades are going to be engaged in 2019 the implication would be a cyclical, not a counter-cyclical global environment. At least until the inflation and rising long-term interest rates likely to attend it eat away at the cycle and ultimately end it.

But it is probably not as simple as jumping from here to there in linear fashion. The Fed has recently and famously shifted from hawk mode to dove mode. They did this almost in real time as some economic data took cliff dives and the bond market relieved the interest rate pressure that was driving the Fed in 2018.

But I ask you, what drives inflation? Or more accurately, what drives the Fed and global Central Banks to conduct policy operations that result in the effects of inflation (rising costs, asset prices and by extension economic disparity)?

The Fed pulls levers. In order to have a lever to pull it needs a cover, a reason to be perceived as inflating the system for the good of the economy and thus, the people. Greenspan did it in 2001 to save the economy amid a crashing stock bubble, epic terror attacks and recession (instigating a massive, inflated credit bubble, which drove all manner of asset prices until liquidation in 2008).

Bernanke did it in 2008+++ (instigating the “everything” bubble we find ourselves dealing with today). He was only dubbed “the HERO” by The Atlantic magazine. The Bernanke inflation especially, has widened the gap between the haves and have nots to unsustainable levels (enter the populist TV star/president). As a side note, does anyone else find it ironic that the greatest redistribution in US history (from the middle and lower classes to the rich) happened under a socialist administration? You would almost think the Fed runs the country to a greater degree than whoever is sitting in the White House.

After a little journey off track I’d like to get back to the opening thoughts above. The Fed needs levers. There is no lever quite like the combination of tanking stock prices (and IRAs, 401Ks, etc.) and a decelerating economy. With the stock market (SPX) getting cracked on Friday from the potential bull trap region above the 2815 target (it closed at 2800 on Friday), if it continues down from here it may achieve an unsuccessful top-test.

The options are simple. With SPX (and other US and global markets) still at support we may either go full frontal von Mises (credit-driven Crack Up Boom) and global macro inflation trade, [or] stocks (and yields) continue declining, giving the Fed a lever to pull for a future whopper of an inflation operation. To gauge the process NFTRH 544 will highlight key support levels in US and global markets, precious metals and commodities (e.g. copper here).

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